If you're an advisor, you are dealing with business factors like new forms of competition, eroding margins, plus a challenging investment backdrop with things like market volatility, geopolitical turmoil, and political stress.
What impact can all of this have on an investor's financial plan and the assumptions that go into a retirement plan and retirement goals?
Then, you've got this 24/7 droning news cycle that increases client anxiety. Some say, take a deep breath, step back, and look at what's happening. Maybe call it a unique opportunity to demonstrate the value an advisor brings to a relationship and the opportunity to optimize the value of your practice.
In times of stress like this, advisors are presented with a unique opportunity to differentiate and create a competitive advantage. This is the key to maximizing your practice value.
Let's talk about maximizing your practice value. First, you should ask yourself, "can I be in two places at one time?" If the answer is no, your firm is considered a lifestyle practice. But if you've got great backup and can be in two places at one time, then maybe let's start looking at you differently. Perhaps you can become a high-margin, quality, sustainable business with long-term revenue streams even after leaving the practice.
A good business can exist if the owner goes away for six months. Will employees look at each other and think, who will take care of this or that? Or will the operations continue to run smoothly? If you can't pass the six-month test or be in two places at one time and do not have a succession plan, you should consider selling your practice.
An advisor grows and scales the business to maximize value. When you launch your firm, you should keep the end in mind. Some think that growth and scale are the same thing. And really, they are not. When starting a business, the things you do to grow are much different than what you do to scale the business.
So, let's talk about that for a second. One of the things to think about in the growth phase, moving to the scale phase, is outsourcing. Outsourcing can be an excellent way to accomplish growth and set yourself up for scale. It's a good way to achieve being in two places at one time. Free yourself to focus on what's important. So, what things can advisors do to free up their time vis-a-vis outsourcing?
By outsourcing, you don't have to hire staff that affects your expenses and EBITDA (earnings before interest, taxes, depreciation, and amortization). One area that successful advisors outsource is portfolio management. It is challenging to manage portfolios and service your clients well. The cost of what it takes to outsource is far less than hiring an internal portfolio manager. For example, you could go from a mutual fund at 100 basis points to using a separate account manager at 30 basis points. Tack on a little bit for the outsourced firm, and suddenly you are saving money and time. You are no longer running the rebalancing, the trading, and all the administrative work on the operations side associated with portfolio management. And you're also not paying a couple hundred thousand dollars to traders and portfolio managers, for software, and dealing with risk assessments. This can increase the value and efficiency of your firm. Outsourcing is an easy way to improve the EBITDA margins and have consistency and predictability in how the business runs when you have 100 accounts that belong to 100 different models.
So, from that perspective, outsourcing can be a great way to implement operational efficiency and scale, as well as economic efficiencies.
You can have two financially identical firms. They both have four million in revenue. And yet, their multiples are different. One is probably performing better due to a more sustainable business design. What separates an advisor from the rest of the pack is the advisor with a great business that provides a successful lifestyle.
Another factor that a buyer is looking for is that the firm has a solid recurring revenue stream. Are most of the clients north of 70 years old? If so, they are in the distribution phase, not accumulation, and that's not a good fit. A buyer prefers a firm that will continue to grow because the clients are still growing.
A buyer may ask, "if you look at your business, how much of it is on a referral basis?" Typically, most of an advisor's organic growth comes from client referrals and centers of influence. And, if referrals are less than 25% of your new business, buyers are not interested.
We've talked to many advisors who think about growing and exiting. A good trait is an owner with a successor already lined up and working with them. With a successor already in place, the owner can make the exit a smooth transition. The best scenario is for the principal to stick around for a few years to ensure client retention. The last thing a buyer wants is for the owner or key employees to leave the organization, and clients are left with no familiar faces.
If employees stay and work together, taking care of the clients and growing the business, the new owner can offer an incentive for growth and client retention. The seller can obtain a payment up front and in three years when he exits. And the best thing is you don't get taxed all at once when you sell your business in tranches. In this scenario, it behooves the principal, the seller, to stick around and help grow the business for additional revenue.
Business valuations and understanding what goes into them are essential. Whatever the owner can do to fine-tune that EBITDA will be handsomely paid when they sell their business. – Ask yourself, "can the business run without me there for six months?" Can you be in two places at once? If the answer is no, you may want to start peeling back the onion layers with the end in mind.
C24-20916 | EXP 2/28/2026